Decoding government’s tax amnesty scheme

Prime Minister, Shahid Khaqan Abbasi, has announced a special tax amnesty scheme in an effort to expand the government’s revenue base. However, it’s expected that the amnesty plan is not likely to be implemented successfully given a number of political and legal risks.

The recently offered tax waivers were promulgated through a presidential ordinance at a time when the National Assembly and the Senate were in sessions. Normal democratic and the constitutional norm is that when the parliamentary session is underway, the ordinance is not issued; instead, the government or opposition members move bills.

The government of the Pakistan Muslim League Nawaz (PMLN) waited till the end of its tenure to offer an Amnesty Scheme which remains open to scrutiny due to political reasons.

Opposition parties have already raised the issue in the Senate. So even if the PML-N government tries to steamroll the law regarding tax amnesty through the National Assembly by playing with its majority representation, it is likely to face fierce opposition in the Senate.

On the other hand, the government can also include this Amnesty Scheme as a part of the Finance Bill, which it is going to be presented in the next few months in the form of the federal budget before the general election. However, there will be little confidence in the Amnesty Scheme among those who are being asked to declare their local and foreign assets. Moreover, they would not have confidence in any ordinance which may lapse after 120 days.

Another underlying test for government is that anyone can challenge the validity of the amnesty scheme in the Supreme Court of Pakistan. The court has the constitutional legitimacy to strike down the scheme. On the other hand, it’s also an opportunity for the government: if the amnesty scheme gets validated from the Supreme Court, then it will have much needed legal cover, for the latter’s decision is likely to be trusted by those who may only see the government’s move only a political ploy before the next general election.

Some tax experts are of the view that more Pakistanis are likely to bring their investments back once the SC offers a legal cover to the government’s tax amnesty scheme, which is being seen as an election move to win over voters

The Foreign Assets Declaration Repatriation (FADR) is a timely move on the part of the government. Already, following the initiative of OECD, 104 countries have signed an agreement, called Standard for Automatic Exchange of Financial Information in Tax Matters, to share banking information of each other’s citizens. This scheme ensures that depositors from foreign countries share National Tax Numbers (NTN) of their home countries with any bank outside their countries. This was done to curb tax avoidance and evasion by the countries who have signed this agreement. However, it is not clear whether the information under this agreement will shred on the basis of a request or automatically.

On the whole, the government’s amnesty offer is that if Pakistanis bring their foreign currency deposits back to the country, they will have to pay two percent tax and if they would like to maintain their account abroad, they will have to declare their total assets and give five percent tax.

Pakistanis who have foreign currency accounts abroad are better served under the government’s new banking laws, for OECD agreement has made it quite difficult for such people to maintain accounts in other countries. Particularly, this has been made further difficult with Pakistan’s name on the grey list of countries that allegedly have weaker tax laws that allow money laundering.

Some tax experts are of the view that more Pakistanis are likely to bring back their investments once the Supreme Court offers a legal cover to the government’s tax amnesty scheme which is being seen as an election move to win over voters. If this happens, Pakistan is expected receive at least USD $2 billion as part of new investments, which is much needed given the current external debt liabilities that have risen exponentially over the last few years.

To attract investments, the government, particularly the FBR has to regain gain its lost credibility which has been lost to an image that only projects corruption, nepotism, and inefficiency.

Foreign currency account holders also have the facility of the 1992 Act, which was also introduced by the Nawaz Sharif government to transfer money out from such accounts abroad, provided the amount is less than USD $10,000.

Financial sector experts believe that much of the Pakistani assets abroad are in real estate, which may not be declared by their owners. However, the law to curb under-invoicing of real estate purchases within the country appears to be a good move as now the government will have the right to buy off properties with under invoiced values. A similar law has been very successful in India.

Whatever the fate of this amnesty drive would be it seems that the present government may not be here to reap the harvest after the next general election which is scheduled to take place later this year.